Nov 10, 2010

An Exodus Recession?

The economy continues to move slowly and economists seem as uncertain as ever about the causes and what to do. Months ago, I began to wonder – could this possibly be the first “exodus recession”? In my first book I sketched out the idea. Suppose economic activity moves from the real world into the virtual world. Human happiness is unaffected or even goes up, however, the goods that produce the happiness are now produced and consumed in a virtual environment rather than the real one. Measurements of economic activity, being all based in the real economy, would begin to show weakness. I argued that contemporary political and economic control systems do not tolerate much weakness, thus, there might well be some sort of crisis in the real world, for no good reason, simply because production and consumption was going “off the books” and into virtual environments. One term for this would be an "exodus recession" - an economic downturn caused by the movement of human attention and energy into virtual environments.

Are we in an exodus recession right now?

First, let's consider the reasoning by which an interest in virtual things would cause a recession in real life. Why would a movement to digital living cause a recession? My point of view has to be preceded by a disclaimer. Despite years of training by macroeconomists, I have to confess that I don’t feel that we (they or I) understand the macroeconomy very well. For better or worse, I tend not to look at macroeconomics using the Keynesian and Monetarist models bequeathed to economics students today. Over the years I’ve become convinced that the macroeconomy is primarily a matter of mass psychology. If we believe that the economy will grow, it will. Employers will invest and hire, workers will borrow and spend. If we believe that the economy will shrink, it will. Employers will hang onto cash and lay off workers, workers will save their money. Log-rolling and self-confirming expectation rule the day, in much the same way that money’s value is a huge social convention. So is the safety of your bank deposit a convention, insisting that the deposit is safe. Convention – think of the economy’s health as a social convention, an aspect of culture. After World War II, Germany and Japan – the most beaten down nations in human history – suddenly became the most vibrant economically. Is it because their governments (and ours) gave them a stimulus? Or was it because their governments carefully preserved the real purchasing power of their currency? Probably not. We call these events “miracles” because the models don’t explain them at all. The economic miracles happened because Germans and Japanese decided, on a cultural level, to be vibrant economies. Workers threw themselves into consumption and work. Companies threw themselves into investing and hiring. The economies grew like crazy. Hope is the thing to hope for; fear fear.

The sensitivity of the state of the economy to our cultural understanding of the state of the economy is greater than ever. We live today in a world where the health of the economy is a widely-reported and narrowly-followed pseudo-fact. Business people focus like laser beams on employment figures, GDP growth rates, and so on. If the GDP growth rate falls from 3% per year to -1% per year – Ye Gods! It’s the end of the world! The impact of such changes on the happiness of an individual person is minimal by itself. But when we read about such things, we all react. Hiring doesn’t happen. Purchases are not made. Lo and behold, the drop from 3% to 1% becomes a drop from 1% to -2%, unleashing another round of anguish. People start to lose jobs – which DOES affect their happiness, a great deal.

The central government responds with stimulus and quantitative easing, none of which will work unless we all believe that a stimulus or QE is just the thing to make everyone believe that the economy is turning around. And if we all have some kind of pessimism about the long haul, if we believe that none of this is going to work, it just won’t – whatever Lord Keynes said.

In such an environment, even a little thing, if persistent, could touch off a prolonged mood of pessimism. Is it possible that the virtual economy is that thing?

George Will recently wrote about the increasing speed with which our experiences are going digital. Using data from Robert Weissenstein, chief investor for Credit Suisse, he notes that “In 2001, the iPod arrived. Less than a decade later, the number of employees of music stores has declined from about 80,000 to 20,000.” And “Three million iPods were sold in 2.5 years; 3 million Kindles were sold in two years; 3 million iPads were sold in 80 days; 3 million iPhones were sold in three weeks.”

Let’s construe the notion of “virtual economy” quite broadly: If you receive an experience by yourself through a machine that runs on digital technology, without doing or buying anything physical (other than press a few buttons), it’s virtual. To download a song and listen to it on your iPod is virtual; to go to a concert is real, to buy a CD and play it is real, to play your own instrument is real. The difference I want to highlight is in the physical nature of the economic transaction. The virtual transaction does not require the movement or alteration of anything physical. Not even physical money changes hands. The real transaction involves material being created, moved, consumed, all by human hands.

Using these concepts, there’s some evidence that an exodus from the real to the virtual is not only already underway (as I argued in my second book) but that’s it’s gotten big enough to affect our sense of a whether the real economy is healthy or not. In support, here’s a series of random judgments about the state of the real world.

TV viewing is down among 18-34 year old males, and movie attendance is flat. Meanwhile, more and more time is being spent online or playing videogames. If you want to get 80 hours of fun watching movies, you need $1000. You can get the same fun from a game for $50. Spending time online or playing videogames simply involves less expenditure in the real economy.

Human eyeballs see a lot fewer ads than they used to. As noted, some people are watching less TV. For most others, the TV they’re watching is increasingly DVR’d or Hulu’d, that is, stripped of ad content. On the internet, we avoid ads easily – they are usually in the periphery, and if not we can click them away, or surf to something else. Advertisers have made an industry on the presumption that ads make people buy things. If they are right, it follows that fewer ads would result in us buying less. Ads are less and less a part of our daily experience. HBO’s success with a show about evil advertisers is perhaps apt now, because we feel we finally have gotten the upper hand on these miscreants. The net result of our power over advertisers, according to their own model, would be a weakness in general real-world consumption.

Facebook is a great way for people to connect. In some FB games, you can buy someone else a beer. You can poke them, write on their wall, friend them. None of this causes anything in the real world to be moved or changed. There are 500m people on FB, hundreds of millions more on other, similar social networking sites. If you’re friending people on FB, you’re ever so slightly less likely to be sending them a real Hallmark card, ever so slightly less likely to write them a note on paper, ever so slightly less likely to give them a call. That’s probably not going to turn around, either. Our ability to socialize online puts a crimp in our general need to move stuff or change stuff in the real world.

People who spend time online don’t have to worry about what they are wearing. Suppose that some percent of a given day can be spent in pajama’s, the rest must be spent in decent clothes. For decent clothes, you need a whole and varied wardrobe. For PJ’s, you need a few comfy ones. Now increase the amount of time that can be spent in PJ’s. The demand for decent clothes falls, if ever so slightly. The internet allows us to do all kinds of stuff in our PJ’s – so it must have an ever so slightly dampening effect on the market for fashion.

One could go on. It is possible, slightly, that there’s a general weakness in consumer spending simply because, to get our social, emotional, informational, and needs met, we just need fewer movies, fewer beers, fewer trips, fewer shoes, fewer things in general. What if the world of human beings suddenly became converted to the idea of consuming less stuff? Why, there’d be a recession, of course. Less buying means fewer jobs and less investment, which means economic contraction. It would mean a general pessimism about the prospects of business.

If our culture suddenly went Green, for example, we would have a recession but we would also understand its cause. We would know that a dissatisfaction with materialism led to economic weakness. But if this conversion to less consumption came from a different and more obscure source, how would we identify it? What if real world consumption refused to grow not because people were becoming hippies, but because they remained selfish materialists who had, however, come to enjoy virtual matter? If an exodus recession were underway, what would the world look like?

For one thing, the general pessimism about the economy in an exodus recession would not extend to the industries that produce virtual experience. Indeed, the video game and social networking industries are booming right now. Computer and digital entertainment hardware and software – doing quite well, thank you. Bold innovations in devices happen every year, and the number of apps is skyrocketing.

Another aspect of an exodus recession would be that consumers, in general, would not be expressing much general pessimism about being consumers. There’d be no sign that people had given up on the idea of buying and selling things. They’d be as interested in money, the economy, and jobs as ever. However, they would consistently say that they’re slightly less interested in buying a washing machine than they were last year. You don’t have to do as much washing when you spend more time living through your avatar. They’re going to be slightly less interested in a car because they’re not going to go driving around quite as much. This has nothing to do with malaise or lack of government stimulus or the conversion of a culture to moderate spending. It begins with people buying digital stuff instead of real stuff. And indeed, we find in the recent US election that people are very interested in jobs and the economy. Yet collectively they seemed to react less powerfully than expected to efforts to stimulate their real-world spending. This would make sense if people are turning their consuming energy to mp3s, FB gadgets, and Xbox Live Achievements. Having a new road is not going to have much effect on an economy based on digital goods.

These are all conjectures, of course. It’s a what-if. Is it possible? I thought we would not see a real-world recession caused by the removal of consumption energy into virtual environments until sometime in the far future. But I didn’t think about the possibility that the term “virtual environment,” in its economic meaning, might expand to environments as diverse as Hulu and Facebook. Are people now spending enough time fiddling around with digital stuff that their interest in physical stuff has weakened to the point that it catalyzes an ongoing cycle of economic pessimism? Perhaps not. But some trends certainly point in that direction. Even if this is not the first exodus recession, one wonders how far off that first one may be.

An interesting idea. At this point however, I believe it could only be a contributory factor at the very most. Your last point is more interesting, as given our current economic conditions globally (I am in Britain), an exodus might be accelerated as we retreat into the comfort and security of virtual consumables.

TV consumption is passive as is watching film. It is the ergodic (Aarseth's term meaning: non-trivial activity necessary to participate) that sets games apart. Sliding into Bogost we can then discuss the procedural rhetorics present in games, that are also not present as TV is not interactive.

That said:
Dr. Castronova, my question would pertain to the infrastructure growth necessary to support virtual economies. Sure retail clerks would have to find new employment opportunities, but what of the "code monkeys" that work on iTunes or Amazon. UPS and FedEx's numbers would also be interesting, as their shipping numbers could be pertinent. Not to say anything about the people who are generating secondary material related to virtual content. WoW-head or WoW-wiki as obvious examples but more nuanced would be LFG or Penny Arcade...and their ISP's and IT people.

Perhaps the formulation shouldn't be a binary of IRL/VirtuaL, but rather the border spaces between the two. The co-ed who wears her PJ's to class, the pair of gamers who meet and fall in-love online that move in together, necessitating the expenditure of capital for relocation...and perhaps another expenditure for the separation. FB as a means of durable social network for engaging in IRL reunions.

These interactions are not born entirely from one or another world, rather they draw from both. Maybe the issue isn't with Exodus, rather it lies with a paradigm of purist notions of metaphysical existence? I would argue that once we perceive virtual goods as congruent with the fictitious commodities as described by Polanyi, then the production and consumption of those things would be as legitimized as mp3's. Trade in them would increase and, McGonigal demonstrates in her Ted talk, greater possibilities emerge.

"TV consumption is passive as is watching film. It is the ergodic (Aarseth's term meaning: non-trivial activity necessary to participate) that sets games apart. Sliding into Bogost we can then discuss the procedural rhetorics present in games, that are also not present as TV is not interactive."

Spoken as a meta robot- and just limited and not fully examined.. . the myths of "interactivity" and even more of "games" are already present. Its sad that so many will be reduced with such non thinking reviews.

Its still amazes me that today's "gamers" are unable to believe in the value/affects or comprehend anything beyond the Atari's first sales.;)

Google "1909 and Machine" for the fiction and human element. And talk to an older roleplayer who had went to a Star Trek Convention in 1978.;)

I think this post is right on. Love it, or hate it, the virtual exodus could definitely be a contributing factor to this recession - or at least to its sluggish recovery. I also agree that this phenomenon will become increasingly apparent in the decades ahead.

From my perspective, I'm also interested in the architectural / building construction ramifications of this as well. As organizations continue to realize that certain functions (not all..) can be performed as well - or perhaps better - in a virtual space, they can immediately begin to realize great savings (and a reduced environmental footprint) by reducing the amount of physical space they need to consume. This is already happening to a certain extent, and has been for quite some time, but I'm sure this recession is accelerating its pace, and enticing lots of would-be bricks-and-mortar establishments into a virtual counterpart.

Or maybe the virtual world has yet to realize the real complexity of the real world. To many factors making up the recessions cause and too many factors to make a resolve as well. Let's just hope that resolution to this dragging economy come to play soon rather than much later.

Andy said: "One thing to consider: most VR purchases require some kind of additional outlay in RL stuff, even if it's an initial outlay."

I overlooked this point in the essay. It's a good one. The fact is, if I play an MP3 on my iPod, I had to buy the iPod. Doesn't that boost the economy?

It sure does, and therefore we need to consider not just how economies grow or decline but how they shift from one area of profit to another. Let's untangle it. Suppose someone invents a machine that will do all the work of professors, who currently earn $10m per year total. The machine costs $1m. The first effect is that all the professors get fired - that's bad. (Or good? Maybe I should have used lawyers.) However, the people who made the machine get a bunch of profit - they charge $10m for the services professors used to provide, and so they get a nice $9m profit. What do they do with it? They go spend it on something, which generates jobs for other people, such as, unemployed professors. Some win and some lose. But in the end, and this is the key point, the economy is bigger. It's doing more than it could do before, because it's getting all the services the professors used to provide, AND it's getting all the services they now provide in their new jobs. Adding the machine makes the pie bigger.

Sometimes the pie gets so big, so fast, that people who seem to lose because of innovation actually win: Their smaller share of the bigger pie turns out to be more food than they had before.

This certainly seems to be the case from the period 1800 to 2000 in Europe. Industrialization is accused of causing all this misery, and yet, if you look at the teeth of the poorest person in 2000, they are in unquestionably better shape than the teeth of the poorest person in 1800. Indeed, the strongest argument I can think of in favor of individual liberty, free markets, small government, and the rule of law - laissez-faire capitalism - is the existence of 5.5b people who would not be here if there had not been a Western tradition that allowed the industrial revolution to happen. Whatever their condition in life, they get to hold hands, look at sunsets, laugh at jokes, and hold their babies, absolute goods that simply would not have obtained if western civilization had not been Western Civilization. Count me as one who is glad that government activism and critical theory were not as popular or powerful in 1770 as they have been more recently.

Yes: Love the change and let it go. Yes: The iPod makers are doing quite well now while car-builders are seeing their jobs going to other countries. This is the sad pain of adjustment. Think about the car-builders' kids, though.

And as for the overall decline in the economy, we must understand that the decline is only in the economy as measured, not the economy in general. "The economy in general" refers to all sources of material value, whether real or virtual. A beer given in a Facebook game makes someone happy; it therefore counts as part of economic well-being. It just doesn't show up in the books. Because it isn't in the books, we all think/are told that we are getting poorer. In fact, we're getting richer on net, while some people are facing a painful adjustment from building fiberglass cars to building rendered beers. Things are indeed getting better, but in an exodus recession it won't look that way at all.

Great essay. I was very skeptical of your exodus concept when you first came out with it, but it's starting to make so much more sense to me now. I guess you were ahead of your time! (well, of me, anyway)

I think that many people's immediate reaction is to say that we need to develop a better measure of economic activity, like an extended GDP, to capture all that online buzz. But another way to look at this is that it's one of the things currently undermining the whole concept of GDP. In Animal Spirits, Akerlof and Shiller call for a re-fashioning of macroeconomics as a psychological and sociological field of enquiry, very much like you do above.

To present my own casual criticism of mainstream macroeconomics, let me comment on your apology for laissez-faire capitalism. The rapid rise in material prosperity since mid-1700s is surely a great achievement and has contributed immensely to human well-being. But I think that as we arrive in the 2010s, we in the developed world find that material prosperity is no longer the bottleneck that limits our well-being. Consumer theory in economics assumes that the satisfaction of wants increases well-being, but it's a simple empirical matter to show that in many cases this is no longer so. New iterations of clothes, shoes, toiletry, toys, Christmas decorations and Happy Meals, which our economy produces at an intensifying pace, will not result in greater happiness, even if our human impulses do drive us to desire them.

On the same grounds, it's possible to question the idea that economic change is always for the better. Yes, given a free market, Facebook wins over writing letters. But the notion that the resulting societal change is for the better is only an assumption. It may be impossible to show it empirically. Likewise for the professor replaced by a machine.

GDP was certainly a relevant measure 50 years ago, but to what extent is it now?

The observations of this post mesh well with what happened with PC gaming a few years ago. Everyone saw retail spending fall and assumed that PC games were really, truly done for this time. Then someone decided to add money spent on online games (that is, MMOs) to the figures and found out the money didn't disappear from PCs, it was just going where it wasn't measured by traditional retail charts.

Edward Castronova wrote:What do they do with [$9 million in profits]? They go spend it on something, which generates jobs for other people, such as, unemployed professors.

The more I've take a look at the economy around me and the more I've run a business, the more I see the failure of this particular theory. Nothing requires new jobs to be created. Maybe they just pay existing people more (and those people pay their existing people more or stick it under a mattress, etc.) Maybe they pour the money into a distant foreign fund that doesn't produce any jobs on a level meaningful to the displaced professors. Or, maybe they keep paying their people to make $1M instant professor machines which eventually rot in a warehouse because there's an upper limit on how much professoring needs to be done. Maybe those professors become homeless since they can suddenly no longer pay for their mortgages (or, let's be realistic, rent) so they worry more about finding a warm place to sleep rather than creating the next business.

I'm sure that there are plenty of economic theories that show why this should stimulate things, but I just haven't seen it in a practical sense. It's like how I could show that some change in an MMO should make people less obnoxious to each other, but that doesn't seem to match with experiences on the ground.

I congratulate you on becoming aware of the failings of both Keynesianism and Monetarism. But before you go chasing virtual ghosts, you should familiarize yourself with the OTHER free-market theory, known as the Austrian School (so-called because it originated in Austria). This theory not only predicted the recent crash, but the details of how it happened, and why current conventional nostrums might create a temporary relief but can't work in the long run.,

I should point out that during the last Great Depression, the entertainment and liquor industries did quite well. Another sort of "exodus," or more likely an effect more than a cause?

Ed, a point that really bolsters your thesis occurs to me: Apple (which basically sells virtual economy distribution platforms) now has a market valuation close to Exxon, the largest company in the world:

Vili, thanks for pointing us to the Akerlof / Shiller book. I didn't know there was a book out there with that point of view. I have to read it.

I also agree that the time for matter-based GDP is past. The relatively new field of positive psychology holds out hope for a new economic and social policy, one tied more directly to human well-being, not just how much stuff we have.

Game designers are pioneers of this new policy. Who knows more than they about the contours of happiness in community?

Well, as we science fiction writers like to say, we're about to transition from the economy of scarcity to the economy of abundance. The more we move toward things that are infinitely (and freely) replicable as metrics of success and happiness the world will be a better place.

(I deal with some of this in my WWW trilogy about the future of the web.) We've got a real opportunity to make the world be about IDEAS and CONNECTIONS, not material possessions, and that's all to the good.

I don't believe that the business world places as much emphasize on GDP as many seem to believe. Keep in mind that for most; it's the media's interpretation of business that we digest. A medium that has vested interest in mass appeal makes for a poor teacher of the intricacies of business.

GDP is easy to understand, unemployment rates are a nice empathetic way to draw your audience in, but just like popular economic theories, they merely serve as a guide rail to experience and understand economic situations. A fair amount of education and analysis is still needed to truly appreciate the true nature of the business world.

Ed is right; business is psychology. But this is something everyone should have known. After all, transactions happen between two people does it not? Much of the metrics we use today are descriptive but too often confused with prescriptive. When we start mixing the two up is how we fall into a trap. One where we believe we know causation, not its much easier accessed, but less conclusive brother; correlation.

While I think it's probably true that industrialised Western countries have been moving more of their economy into virtual things over the last decade or so, I'm skeptical that the current recession is that kind of exodus:

1. Much of the production of virtual goods is "on the books".

If someone has a paid job for Nokia, Microsoft, Apple, Linden Lab or Metaplace Inc. (etc.) making virtual things, that job features in the government's employment stats, they pay taxes on their income etc. etc.

If employment making virtual things is "on the books", a move to more people making virtual things doesn't account for an on-the-books recession.

The exodus hypothesis would predict companies making virtual things doing well at the expense of the rest of the economy. Possibly this was happening a few years ago, but over the last 18 months, hi-tech companies seem to be doing at last as badly as the rest of the economy [I say this without checking any proper statistics...] If money is short, people can decide they don't really need a new mobile phone, or Windows release, or on-line game. Maybe an "exodus to the real world", in fact.

and all the western programmed apps in the world dont work without the chinese manufactured device. which's making of course , is buying food, and furniture for those new apartment/ home chinese dwellers looking to buy a first car (chinese made ford) soon.....

the only exodus is that of the western middle class. to western poverty class...

corporate entities vs civic entities... and that is reality of an exodus of practical thinking- writing, replaced by blogs and tech fetishists unable to see past the riches of beta to the mess left by being obsolete.

in the 1930s, movies became a huge success because of the escapism. If you haven't watched Brazil in a while, i recommend you watch the lengthy director's cut again. ;) "BRAZIIIIIIILLLLLLLLL!!!!! DA DA da da Da Da daaa DaaaaaaaaaaaAAAA"

Actually, it's true that we have collectively decided to be completely lazy, there is a rational model behind it. We work for less and less value because the ephing Federal Reserve keeps decreasing the value of our money. We have an incentive to not work because it's not socially worth the value we get given in the dollars they compensate us with. Imagine if you saw a real raise of 10% every year in real value instead of the fake 3-4% inflation raise which doesn't keep up with the inflation index! The inflation index is a fake piece of crap anyway due to hedonics and substitutions, which isn't exactly how people measure quality of life. aka, they lie more. So where does this value go? I mean If you have $100 in the bank, that $100 isn't the same $100 in a year, or even a day. (and this is getting more extreme now). Well, the banksters steal it through inflation which is really just a tax without representation. The main benefactors are corporations with their profit motives that use it to get their way with what should be our government.

If your real value for your work was increasing, you would _want_ to work more until you found a good balance for you. If your real value for your work is decreasing, you will work harder to make up for it until it's not worth it any more and i think a lot of people are reaching that point if they haven't already passed it.

The money is flowing into the corporations and elites hands through the use of corporate and elite campaign donation/bribes and lobbyists. Of course the worst part is that they now rubber stamp the candidates through the expenditure of money but they also write the bills their politicians vote on! The corporations have redesigned the system so they have the upper hand... always. The merger of corporate power and government power is fascism.

We live in a shame economy, with a shame democracy, in a shame society of shame values. It's disappointing that people actually defend the status quo. It's not that they are sold out, it's that the system designed them to be ignorant and not question the system. The system designs it so we fight ourselves.

America may not be the place to be when the shit hits the fan.... especially with the HUGE security-corporate-fascist-industrial complex.

I'm sorry to say this, even if every American decided to buckle down and become the most productive people in the history of the world, the primary benefactors would continue to be the banks. Until the monetary system is fixed, until we stop using debt as money, we can't fix any other part of the system.

The solution is easy: Constitutional money. We return to our constitution and issue money that doesn't have interest charges (aka, debt-money). You should read End the Fed by Ron Paul. Maybe then we can end the wars, limit corporations, return rationality to the political process, and start enabling a green economy to actually deal with climate change (regardless of its source)

What seems germane is how many of units of labor, capital investment, and running costs go into producing/supplying an hour of 'entertainment' via an MMO like World of Warcraft compared to Television, movies, books, etc.

Since I can entertain myself all month w warcraft (If I don't care about my sanity) for $15.00, I assume that the effiency of the system means far less economic activity is generated than if I has spent the 15$ on a part of an evening's entertainment at the bookstore or movie theater.

For most of us players, the computer and the broadband connection are a sunk cost and a regular monthly expense we were paying anyway for the phone/TV/broadband data line.

Our exodus to the Synthetic World of Azeroth was a short one, providing adventure, excitement, and a social experience without the trouble of hauling the bowling ball out to Wednesday night bowling league.

Is the exodus the root cause of our current economic travails? Doubtful. Is it a factor in the economies of first world countries with widespread computer ownership and broadband access? I would suspect so, along with ageing demographics, and many other factors.

What I'd like to see is the age demographic of those who prefer to spend their time online, to those who do not.